Introduction

A terrorist attack on the UK is a case of 'when, not
if', the head of the Metropolitan Police said earlier this
year. In the last 12 months, the Charlie Hebdo massacre in Paris,
the bombings in Brussels and the lorry ploughing into crowds in
Nice have created a genuine fear that the UK will be the next
target. The nature of terrorist financing varies considerably: the
so-called Islamic State of Iraq and the Levant relies on funds
generated within the territory it controls (for example from the
sale of oil and extortion from individuals and businesses) whereas
the financing of individual terrorists working alone is more
difficult to trace, as they often rely simply on individual
salaries or welfare payments. Yet whatever their differences, any
serious terrorist enterprise will use the banking system for its
own ends.

Central to combatting the financing of terrorism is the
promotion of greater transparency across the financial sector, with
banks now facing a set of stringent, complex obligations to cast
light on suspicious transactions. The latest proposed addition to
the Government's armoury is the Criminal Finances Bill,
introduced to 'tackle money laundering and corruption, recover
the proceeds of crime and counter terrorist financing'. This is
currently making its way through Parliament. It is likely to come
into force in mid-2017.

This article focuses on money-laundering offences, which are the
most significant element of the Proceeds of Crime Act 2002
(POCA) for those working
in the financial sector.

Client confidentiality?

The banker-customer relationship is of a confidential nature,
and the banker is under a duty of secrecy (Tournier v National
Provincial and Union Bank of England [1924] 1 KB 461). This
duty applies not only to information obtained from an account, but
from any source arising out of the relationship between the bank
and its customer including assessments and information generated by
the bank. It does not terminate upon the closing of the
account.

Money-laundering: the current regime

The principal offences

These are set out in Part 7 of POCA.

Money laundering is essentially the process by which proceeds of
crime are converted into assets which appear to have a legitimate
origin. The substantive offences are set out in ss 327 to 329 of
POCA. These are commonly known as the
concealing offence, the arranging offence and the acquisition,
use and possession offence. Penalties imposed may amount to a
maximum of 14 years' imprisonment; an unlimited fine; or
both.

The reporting obligation

The failure to disclose offence, also known as the reporting
obligation, has caused the most anxiety among those active in
the financial sector (s 330). In a banking context, and in summary,
a person commits an offence if he knows or suspects or has
reasonable grounds for knowing or suspecting that another person is
engaging in money laundering and fails to make a disclosure as soon
as practicable to the bank's nominated officer (the money
laundering reporting officer) who in turn must make a disclosure,
if suspicious, to the National Crime Agency (NCA). This is an objective test. A
person who ought to have been, but fails to be, suspicious is
caught within the section.

To be suspicious means there is a 'possibility, which is
more than fanciful, that the relevant facts exist' (R v Da
Silva [2006] EWCA Crim 1654). The
courts recognise that this requires more than an unusual pattern of
behaviour and is more than a feeling of unease or a gut
feeling.

Suspicious Activity Reports (SARs)

As noted above, it is for the bank's nominated officer to
decide whether or not to make a SAR to
the NCA. At first glance, the making of
the SAR looks like a breach of client
confidentiality. However, the Tournier judgment states
exceptions where disclosure is permissible, including under
compulsion of law. Furthermore, banks can generally protect their
position by ensuring that express confidentiality provisions (often
included in account terms and conditions) are subject to permitted
exceptions.

Having made a report, the bank must wait to receive an
'appropriate consent' before dealing with the property i.e.
going ahead with the relevant transaction.

If the NCA does not refuse consent
within 7 days of receiving the SAR, then
the transaction can continue. If, however, a refusal is sent by the
NCA within 7 days, the NCA then has a further 31 days to decide
whether or not to commence an investigation – a moratorium
period. During this time, the bank cannot proceed. This can cause
difficulties for a bank balancing a customer's expectations and
also seeking to avoid 'tipping off'.

'Tipping off'

One of the biggest problems a bank faces when making a report to
the NCA is to avoid 'tipping off'
a customer regarding a disclosure or a current/potential
investigation (s 333 POCA). The customer
will ask why his payment instructions aren't being complied
with. The bank cannot answer frankly.

An irate customer might apply for an injunction to compel a bank
to make a transfer in accordance with account terms and conditions
(see K Ltd v Nat West Bank Plc (Revenue and Customs Prosecution
Office and Serious Organised Crime Agency intervening [2006] EWCA Civ 1039).

More recently, in Shah v HSBC
[2012] EWHC 1283 (QB), the bank was
held not to be under an obligation to provide information to its
customers explaining the reasons for its inability to act. However,
such behaviour does not strengthen customer relations.

'Tipping off': bank protections

Banks should include an express power to refuse to comply with a
customer's instructions when criminal sanctions might apply;
and to exclude liability for any loss flowing from such refusal
(although this is subject to the reasonableness test).

Increasingly, banks are also using their terms and conditions
and express contractual powers to close down the accounts of those
suspected of money laundering.

In relation to procedural protections, there is some guidance
from case law. In Governor and Company of the Bank of Scotland
v A Limited and Others [2001] All ER (D) 81 (Jan), A Limited
held accounts at the Bank of Scotland. The bank discovered that the
company was being investigated by the authorities. It was concerned
that if it paid monies out of those accounts, it would become
liable as a constructive trustee. On the other hand, a refusal to
honour cheques might invite reprisals from A Limited, and the bank
would not be able to justify itself for fear of 'tipping
off' the company. The bank went to court and an injunction was
granted, freezing the company's accounts at the bank.

The Court of Appeal submitted that this was the wrong course of
action. The correct procedure was set out in C v S and Others
[1997] 1 WLR 1551. The bank should
have discussed the matter with the SFO
(NCA predecessor) to agree on an
explanation to be given to the company. If the bank and SFO had failed to agree, the bank could have
made a 'without notice' application to court for
directions, the defendant in that action being the SFO (not the account holder). A judge would
then have made an interim declaration defining what could be
disclosed. The Criminal Justice Act 1988 was in force when this
case was tried, but the principles applied by the court are still
relevant.

The Criminal Finances Bill and SARs

The Criminal Finances Bill contains:

new criminal offences relating to corporate failure to prevent
the facilitation of tax evasion

The last two points will bring significant changes to the
money-laundering regime. Firstly, the maximum permissible
moratorium period will now be 217 rather than 31 days. Successive
31 -day extensions may be requested. Each extension will require a
fresh application to court; and the court's approval.
Nevertheless, a much longer permitted moratorium period may mean as
much as seven months of inactivity, delay and silence between bank
and customer. This will surely be untenable for most customers.

Secondly, the NCA will be empowered to
serve Further Information Notices to demand extra information from
financial services businesses, as part of an investigation. The
requests may be made to persons in the regulated sector following a
SAR; or if the NCA is assisting another investigating overseas
agency. This will present another compliance burden for banks.

Conclusion

As the threat of terrorism has intensified, so too has the
government's push to peel back the cloak of secrecy under which
terrorists have previously been able to fund their attacks.

Efforts to combat terrorist financing can only be deemed a
positive step forward. However, banks as intermediaries can expect
an increasing regulatory focus on money-laundering offences,
reporting obligations and attendant compliance issues.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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